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You started out talking about income tax, and I will refer to that quickly. When it comes to income tax, the choices that we have made have created additional spending power for the Scottish budget—there is often a misunderstanding about that. The challenge falls in the relationship of the block grant adjustment and the fiscal framework. A lot of that is to do with unequal growth between the highest and the lower earners. That is accounted for in the Welsh fiscal framework but not the one in Scotland, and I think that that needs to be part of the review of our fiscal framework.

Moving on to productivity, the report was very useful in its breaking down of the detail, particularly of where the challenge is. It is an issue that all developed economies need to grapple with. All developed economies have suffered from an extended period of weak productivity growth over the past decade or so. Tackling that challenge is not made any easier by the fact that we are facing into huge productivity head winds as a result of labour shortages, supply chains disruption, disruption to our trading relationships with our nearest and largest trading partners, and our demographic challenges.

What are we doing about it? I have a number of points. One is that, again, I see this as a top priority. I am not shying away from the fact that we need to grapple with our productivity challenge. One of the primary ways that we will do that is to set it out in our national strategy for economic transformation, which is our 10-year outlook. It will include core data on productivity and set out three recommended interventions, which have been informed by the strategy’s advisory council of about 17 people. I am keen to publish that strategy. The committee will, however, appreciate that there are tensions around publishing an economic strategy that looks 10 years hence when businesses are in severe difficulty right now—three days before Christmas—so there is a bit of a timing challenge in doing that.

However, a lot of it will look at the need for public investment in core infrastructure, at private investment, or how we incentivise business to invest in businesses, and, lastly, at skills, or how we ensure that the workforce are in the right jobs, for the right businesses, during the right times. Those are the three areas that I would quickly recommend we step up our activity on.

No. As a Highlander who knows the importance of such roads and who has driven up and down the A9 far too often to count, I think that it is really important that we continue to invest in Highland, northern and north-east communities.

I hope to be able to build a constructive relationship with the new Chief Secretary to the Treasury. I had a good first conversation with him just over a week ago. I am due to see him on 14 October for a quadrilateral meeting about the spending review and I may be able to answer the question better after that meeting. I am happy to provide the committee with an outline of that meeting and an update about how it goes.

Thank you for the invitation to join the committee, convener. I am sorry once again not to be with you in person. I hope that the committee has not started to draw any conclusions from the fact that I seem to have to self-isolate only when I have a Finance and Public Administration Committee evidence session. I also thank the committee for its engagement to date with regard to the budget timetable.

I know that you asked for very brief opening remarks, convener, but I wonder whether I can make some comments that will be helpful to the committee’s scrutiny. I am grateful that, in agreeing 9 December as the date, we have duly balanced the time to develop our budget proposals with the time for due scrutiny. As the committee knows, our position is as ever contingent on our settlement from the Treasury on 27 October, but this year at least we should have firmer and fuller information than we have had for the two previous budget processes. The timing of the United Kingdom spending review and the autumn budget seems to be a return to the pre-Brexit and pre-Covid cycle, but as yet I do not have any insights into whether that means that the Treasury plans an update in the spring.

With this budget, the fiscal framework and the wider devolution settlement will continue to be tested with the related volatilities having increased and the levers and the flexibilities remaining constrained. That applies as much to our in-year management, with the UK Government repeatedly indicating consequential funding of “up to” a provisional amount that is subject to confirmation later in the year, by which time the moment or the need for that funding has often passed. As I have always said, additional funding is generally welcome when it comes, but what I want to emphasise is that the arrangements for confirming the funding generally fall short of what is required, especially during a real-time pandemic response.

I will continue to engage positively with the UK Government as we recover from Covid. I had a meeting with the new Chief Secretary to the Treasury last month, and in the coming days I am due to attend a finance quadrilateral that is focused on the spending review. We will, of course, take our strategic lead from the programme for government, and the budget will reflect and fund the Government’s priorities. Moreover, as indicated in our recent correspondence, we are continuing to carry out preparatory work on a multiyear resource spending review, and we plan to publish a framework for consultation around the time of the budget.

Finally, I will be pleased to answer the committee’s questions on the fiscal framework outturn report, the publication of which fulfils the Government’s commitment to transparency in the operation of the fiscal framework and provides the Parliament with information to support its scrutiny. That report shows a total provisional reconciliation of -£14.8 million that will apply to the 2022-23 Scottish budget, with the final reconciliation confirmed once the final outturn data are published later this year.

I look forward to the committee’s questions.

We do not need to wait for that. Conversations are continuing with the UK Government, and we are still fully committed to devolving the duty. There are two points to highlight. The first is that we were making good progress on resolving the Highlands and Islands exemption. Secondly—although I do not want to keep using it as an excuse—the fact is that Covid struck. Many areas that were being progressed at pace prior to Covid are now being picked up again. Because of the wider conversation that we are having on the fiscal framework, it makes sense to have our other conversations in that context.

There are two parts to that. First, we need a growing economy to ensure that there are tax revenues. I am a firm believer in the notion that, if businesses are trading well and paying their taxes, we have a secure source of revenue, and that was the reason why we extended non-domestic rates relief for a full year. We could have implemented non-domestic rates halfway through the year, when signs of recovery were obvious, but I wanted to extend relief to a full year in order to maximise the time for industry to recover. As we go into the budget, we will be very cognisant of the need to ensure that our taxation enables businesses to fully recover and fully trade. Clearly, since the pandemic, other challenges have faced business, not least the shortages that have perhaps hindered their ability to trade fully.

Secondly, we have to continue to use the mix of tax that we have. We get limited income tax as well as non-domestic rates, which, although a property tax, are often considered as the primary business tax. To be honest, I do not see any huge room for manoeuvre in both just now. We know that, when it comes to income tax, what really matters is our performance relative to the rest of the UK; moreover, we do not have allowances or incentives with it and we have to be mindful of how it interacts with national insurance contributions. As for non-domestic rates, they are a property tax rather than a business tax.

My first answer to your question, therefore, would be economic growth, and my second would be room for manoeuvre on tax policy.

It is a very significant consideration in our budgeting. You have mentioned a number of the impacts that it can have on our budget, but perhaps the most obvious one relates to pay, given that a significant percentage of our budget is spent on people—for example, the staff in our NHS, local government and public bodies. Public sector pay is therefore an important element of our budget setting; it has certainly been a big focus of previous budgets, and you have to be mindful of inflation when it comes to public sector pay policy. Inflation has other implications, too, but as you will know, it has an impact on costs, and we cannot escape its impact if we are to achieve our policy aims or build the infrastructure that we want to build.

I do not want to put him on the spot, but I wonder whether Dougie McLaren wants to come in on this question.

I am certainly open to suggestions about, and we will give more thought to, how we can be more publicly transparent in the budget. However, a more mature debate about the realities of budgeting is required, because a lot of our budget is demand led. Budgets were demand led for some business support. If, for example, we announced that £50 million was available and only £40 million was spent, which exhausted demand, accusations that the budget was underspent would be made, but that is the nature of demand-led budgets.

Sometimes demand can exceed the budget that is allocated, so we must manage that, and sometimes demand is less than was forecast. Budgets are a moveable feast, and budget revisions—they usually happen twice a year, with the exception of the Covid period, when they have happened three times a year—are just a snapshot in time, and as much certainty as possible is required when we publish them.

You made a point about the UK Government. I am sympathetic to the UK Government’s position that you cannot definitely say to the penny how much will be spent over a year at the beginning of a year or even at any point in a year, because who knows what might happen? Fuel shortages might happen or other events might need to be responded to. Budgets will always be slightly moveable feasts. My difficulty is not with budgets being a moveable feast but with having a fixed budget that must balance, which means managing a very volatile situation with very limited levers.

To go back to your question, if we can do more on transparency, I am open to that. If we can build more transparency into the budget revision process, I am open to that. I know that the committee will scrutinise that in the coming weeks, so your feedback from that could inform future budget revisions.

Your predecessor committee was very helpful in this regard. Its report on the fiscal framework was supported by all parties. The report identified some benefits of the fiscal framework, particularly during a period of volatility, but it also identified some of its shortcomings. We are due to work with the UK Government to commission an independent report on the fiscal framework. I am keen that that report captures all the points that the previous committee and independent stakeholders such as the Fraser of Allander Institute highlighted.

The previous committee’s report demonstrates that the arbitrary caps on borrowing for the forecast error and on spending are not keeping pace with inflation, with the size of the budget or with the potential size of the forecast error. The report also suggests that we have limited ability to carry forward and manage the budget across years. Thirdly, there are challenges to managing levels of volatility and risk and we should consider some additional levers to help the Scottish Government manage that. It is a very technical area and I would be grateful if the committee continued considering what it believes should be done with the fiscal framework. The review or the report should not be so narrow that we are not cognisant of what the pandemic has taught us about the operation of Scottish Government finances.

I think that that is a fair point. Although interventions around young people are important, we face real challenges in relation to people who face redundancy or have been made redundant because their industries are changing. That is where the national transition training fund comes in; it seeks to provide funding to particular sectors to help their people transition.

For example, I take you back to the tourism recovery plan. Bear in mind that that was the response to recommendations that were established by the tourism recovery task force, which was composed predominantly of industry leaders. They asked specifically for help for reskilling and retraining. An element of the national transition training fund has therefore gone specifically to help the tourism and hospitality industries reskill and upskill their staff. Obviously, they are facing labour market shortages, so it is really important that the right skills are there.

When it comes to people who are moving between sectors—upskilling not within their sector but between sectors—we also have support in place. Perhaps we need to review that support and make sure that it is fit for purpose, as we progress through the pandemic, to help take people from where they are now to where they want to be. The most obvious example of that would be providing support for people in the oil and gas sector, who have, unfortunately, faced redundancy, not because of decisions made by Governments in this country, but through the global reduction in the demand for oil and gas. That support needs to be made available within and across industries.

I will make a final point before I stop. Through partnership action for continuing employment—PACE—which is the wraparound support for employees who face redundancy, we have specific and targeted training available to help. However, it is a huge challenge to equip people with the skills that they need to transition to a new job or a different job in their industry.